The doctrine of privity means that a contract is said to be a contact between the parties who are expressly mentioned in the contract and no third party can sue upon it even when the third party has its avowedly made for his/her benefit. Further the third party is not even bound by the terms of the contract since there is an absence of mutuality.
Initially the doctrine was recognized and developed in the case of Dunlop Pneumatic Tyre Co. Ltd. v/s Selfridge & Co. (1915), the plaintiff used to trade goods via sale to Dew & Co. and there was an agreement between the parties that not to sell any goods below the price listed and if they fail to comply with it that is if they sold goods to another trader then they would have to obtain from him a similar undertaking to maintain the listed price. The Company sold its goods to the defendants to who shouldn’t have as per the agreement that they will not sell below the listed price. The plaintiff sued them by stating that there was a breach of contract, but eventually failed to proof as there was no privity of contract between them and the plaintiff.
The notion of privity of contract is identical in the Indian setting, with the main distinction being that in India, an alien to consideration can sue, but in English law, he cannot.
ESSENTIALS OF THE DOCTRINE
1.A contract has been signed between the following two parties: The most crucial need is that there be a contract between two or more parties.
2.Parties should be competent and there must be a legitimate consideration: The presence of consideration and the competence of the parties are prerequisites for the application of this theory.
3.Breach of contract: If it was seen that there has been a breach of contract by one party then the basic prerequisite for the application of the theory of privity of contract is a breach of contract by one party.
4.Only contracting parties have the right and authorization to sue each other:- Following a breach, only contract parties have the right to sue each other for non-performance of the contract.
DIFFERENT ASPECTS OF THE DOCTRINE
1.Third-party acquisition of rights – this is resolved in the negative, and the finest exposition of the law is that in Krishna Lal Sadhu v. Pramila Bala Dasi AIR (1928) Cal 1315, it was stated that as per – Section 2(d) broadens the concept of consideration to allow a party to a contract to execute it in India in certain situations where English law would treat that person as the receiver of a merely voluntary commitment and would deny him a right of action on the basis of nudum pactum. It seems that there is nothing in section 2 to support the concept that contracts can be executed by someone who is not a party to the contract, but the definitions of ‘promisor’ and ‘promisee’ explicitly prohibit this notion.
2.Imposition of obligations on a third party – In general, two people entering into a contract with each other cannot impose contractual responsibilities on a third party. In Gujarat Bottling v. Coca Cola AIR 1995 SC 2372, G and C also agreed that G would not transmit the contract’s rights, even indirectly, without C’s agreement. Without C’s approval, the owners of G transferred their shares in G, which had the same effect as an assignment. It was decided that because G’s shareholders were not a party to the contract between G and C, they were not obligated by it.
EXCEPTIONS TO THE PRIVITY RULE
–Charge or Trust – when any charge or any other interest is been created in favor of a person is been created in a particular property can be enforced on it. In Khwaja Muhammad Khan v/s Hussaini Begum (1910) 37 IA 152, it is one of the landmark judgment where the facts were as follow, there was an agreement between her father and her future father-in-law that in consideration of her marriage with his son, he would pay a Rs 500 per month to her in perpetuity for the betel-leaf expenses and for that purpose a charge was created in an immovable property. Later, the wife filed a suit for the recovery of arrears of annuity which was upheld by the court.
–Estoppel or Acknowledgement: If a party is obliged to make a payment to a third party and recognizes it (through making a partial payment), then a binding obligation is formed on the party making such recognition.
–Marriage settlement, partition or other family arrangements: These clauses are considered as an exception to the theory of privity of contract in order to preserve the rights of family members who are unlikely to receive a particular portion and to provide maximum effect to the testator’s will. When a girl’s father entered into a marriage arrangement with the defendant, it was decided that the girl may sue the defendant for damages for breach of the promise of marriage even though she was not a party to the contract in the famous Rose versus Joseph AIR 1925 Bom 97 decision.
–Covenants running with land: When a person purchases land with the knowledge that the owner of the land is obligated by specific responsibilities imposed by an agreement or a decree touching the land, the person acquiring the land is bound by them even though he was not a party to the initial agreement made. This was determined in the case of Tulk v/s Mochay (1919).
Initially only contracting parties can sue each other, no outsider is permitted to enter between the parties to suit. However, as time passed, the law evolved, and now even a stranger is entitled to sue to protect his interests in extraordinary circumstances.
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